Interest rates fall………..insurance costs rise

At the end of February this year, the Lord Chancellor made an announcement regarding the Discount Rate, known as the Ogden Rate, which is used as part of a calculation when assessing compensation awards to individuals who become seriously injured.

Claim settlements are made up from a number of key components. When calculating future loss of earnings, courts will multiply the amount they consider the claimant will lose each year taking into account their age and projected mortality rate. The future cost of care also uses similar calculations.

In serious injury cases, these calculations will be high as any settlement is designed to provide financial assistance for a number of years. When such an award is made in the form of a lump sum, this can equate to a very large amount of money.

As a claimant would be able to invest this lump sum and earn interest on this, this is taken into consideration and an allowance is made by the courts. Therefore, the amount awarded is ‘discounted’ by the amount of interest that can earned over the period of time. This adjustment is known as the Discount Rate.

The Discount Rate has changed from 2.5% to -0.75%, meaning rather than any lump sum award being discounted by 2.5%, the settlement will need to be increased by 0.75%. This is as a result of a decision that predicted long terms investments will produce a negative result. This means that the future value of claims will increase, more so for younger claimants.

As the Discount Rate applies to injury claims, the main insurance products this will impact on is Motor (including Motor Trade) along with Employers’ Liability and Public & Products Liability. Property-led products such as Property Owners and Landlords cover will also be affected. This will result in premiums for these areas of insurance increasing. It is not possible to predict what these level of increases will be as insurance is rated on a large number of factors as well as individual circumstances.

As an independent broker, we are in a strong position to review your insurance each year not only to make sure that your renewal premium is competitive but also to make sure the cover you have is sufficient for your needs.

Should you wish for us to review your arrangements, please contact me.